Franklin and moneyWhen we learned of some big changes in tax deferral rules for 401(k)s and Roth IRAs, we asked private wealth advisor Edward T. Kelly, CFP®, CLU®, ChFC® to give our readers some details as we approach year end tax planning time. Here’s what we learned:

The IRS released positive news last Fall regarding converting after-tax monies in your 401(k) plan to a Roth IRA, tax-free (known as IRS Notice 2014-54).  A 401(k) after-tax conversion allows earners a chance to build funds in a Roth IRA while still allowing the ability to maximize pre-tax or Roth 401(k) salary deferrals.  Income limits prevent some earners from making direct contributions to a Roth IRA and while they may convert a traditional IRA to a Roth IRA, the tax consequences can be significant.  Roth IRAs are one of just a few ways to accumulate tax-free wealth.

Many large employer-sponsored 401(k) retirement plans allow participants to make after-tax contributions to their 401(k).  After-tax contributions to a 401(k) plan are not subject to the contribution limits that apply to pre-tax or Roth deferrals (i.e. $18,000 this year or $24,000 if you are age 50 or over).  They do, however, count against the overall contribution limit of $53,000 (or $59,000 for those 50 and over) for 2015.  This overall limit includes all employee contributions and employer matches that are made to the participant’s account.

The after-tax contributions to a 401(k) account can be removed from the plan via an “in service distribution” (at any age), transferred to a Roth IRA and repeated as often as the plan allows. One of my core philosophies involves diversification into three tax “buckets” wherein your assets can be classified as taxable, tax-deferred, or tax free. Many approach retirement with the majority of their nest egg in the tax-deferred bucket for which every dollar may be 100% taxable upon distribution.  The after-tax 401(k) to Roth IRA conversion strategy allows you to build tax-free monies for greater flexibility, tax control, and compounded tax-free growth.

To convert your 401(k) after-tax money, verify that this activity is allowed by your plan with your plan administrator. And while this is after-tax money that could be converted, it is still a tax-reportable event, so contact your tax preparer to verify this strategy makes sense for you now and in the long-term.

About our source: Ed Kelly is an advisor with Hearthstone Wealth Management, a financial advisory practice of Ameriprise Financial Services, Inc., 21311 Hawthorne Blvd. Suite 100, Torrance, CA 90503. You can learn more about him, his company and their services by visiting
And the legal stuff: Ameriprise Financial does not offer tax or legal advice. Consult with a tax advisor or attorney. This information is not intended to be the primary basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns and a tax advisor or attorney regarding specific tax issues. Ameriprise Financial Services, Inc., Member FINRA and SIPC.

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